Olive Garden Doesn't Need Delivery to Dominate the Industry

Darden might be the king of simplification, but CEO Gene Lee cautioned against boxing Olive Garden’s sales surge into a single corner. Since the casual leader’s former chief executive, Clarence Otis, announced July 2014 he would step down by year’s end, Darden’s shares have lifted more than 240 percent, which is skyscrapers above the industry standard. The S&P 500 Restaurant subindex averaged 66 percent in that span.

Focusing on Olive Garden, Darden’s 858-unit brand started the first quarter of fiscal 2019 with its 16th consecutive quarter of same-store sales gains. It increased total sales 6.4 percent, driven by same-store sales growth of 5.3 percent and comparable guest counts of 1.5 percent, year-over-year. The comps sales are Olive Garden’s best since at least 2008.

Lee said the strong showing was the result of “four years of consistently improving the value proposition at Olive Garden.” This was reflected in its Create-Your-Own-Lasagna and Buy One, Take One platforms in Q1. The promotions allowed guests to upgrade to premium entrée selections. Along with fewer incentives and an increase in preference to Olive Garden’s Mediterranean dishes, the chain drove menu mix growth of 1.9 percent, Lee said.

Olive Garden also increased off-premises sales 13 percent in the quarter, which measured to 13 percent of total sales. “Our strong guest count growth is a result of the team's focus on simplification and flawless execution inside our restaurants, culinary innovation that appeals to our loyal guests, creating relevant and integrated marketing and meeting our guests' desire for convenience. Our strategy is working and that is reinforced by the fact that our key satisfaction measures, including value, remain at all-time highs,” Lee said.

Let’s break down how Olive Garden and Darden are winning right now.

Delivery doesn’t always deliver

There are really two main players in the restaurant space scoffing at third-party delivery, at least compared to others. One is Texas Roadhouse. The other is Darden. Lee said the company is testing third-party delivery services as it relates to scale. “We're monitoring. We're learning as this business starts to mature. But for us, there's significant hurdles that we still have to work through,” Lee said.

“We're concerned about how it's executed. We're concerned if it can create incremental growth at scale. We're not happy with the economics. We still have the issue of the data. And lastly, we have to get our arms around how we protect the profitability of our large and growing current off-premises business, which would be difficult to deal with,” he said.

In response, Darden doesn’t anticipate entering into the third-party delivery space in a meaningful way—at least for now. “We'll look at third-party. We just don't see this as something that we want to get involved in today with the current way it's being executed.”

It’s not as critical for Darden as some since the company is growing its off-premises business double-digits without it. Off-premises accounted for about 30 percent of Olive Garden’s comps growth this past quarter. Consumers are scoring take-out and catering high already and Lee said Darden would focus on making sure that experience improves, instead of diverting significant resources into additional channels.

“Right now, we have no interest in delivering a $10 meal to an individual to an individual household. That's just not a business that we think we want to be involved in right now,” Lee said.

Olive Garden and Darden aren’t ignoring off-premises by any means, though. Lee said the company would keep tracking consumer demand and come up with innovative products as it fits. Darden will also deploy technology to reduce friction.

“We think we do an exceptional job in Olive Garden with packaging and process, our on time and correct orders continues to improve,” Lee said. “So we're feeling really good about where we're at. And my goal, our goal, and the team's goal is to create a compelling offer to that consumer so that they are still willing to come pick it up at our restaurant. And our growth in this business is reinforcing that we're doing a good job with it. And so that's where I want to be.”

Olive Garden has said in the past it believes it can reach 20 percent of off-premises sales over time. That hasn’t changed, Lee noted.

‘The war for talent’

When asked about the perceived improvement in consumer confidence, especially as it pertains to casual brands, Lee agreed, “people are feeling good.” However, he doesn’t see the trend as a universal cure-all for the restaurant industry.

“I don't think this is a tide where all the boats are rising. I think well-positioned brands that are executing are performing really well. And I think you're continuing to see that as others announce their results,” Lee said.

Not surprisingly, he pointed to labor as the biggest challenge—and No. 1 differentiator. Specifically, “the war for talent,” where brands that can “hire, train, and retain frontline employees to bring their brands to life are going to win,” Lee said.

“And the dynamics inside the industry are changing dramatically,” he added. “And I think that's where we're focused and that's where I think the winners will be focused—on how do they continue to invest in their team members and how to ensure you're properly staffed to execute against this increased demand.”

In regards to wage pressure, which has seen a 5 percent step-up, Lee said it’s being driven by investments and a dynamic where the employment environment is improving.

“… less employees come out of the restaurant space and into other opportunities. So there's just a shrinking of a work pool here,” Lee said. “And we're committed to hiring the best possible people that bring our brands to life. Our retention rates are actually improving. And I think part of that is because that we're willing to make the appropriate pay decisions to keep our people and that's what we've instructed our operations teams to do. I firmly believe that to win in this environment, you're going to have great team members.”

Menu moves and moving up

Olive Garden’s promotions this past quarter spotlighted high-value options that produced a higher check average. Lee said the brand “felt good” about people trading up to more expensive offerings inside the promotions. Olive Garden changed some merchandising on its menus and saw an increase in its Mediterranean platform. This allowed Olive Garden to pull back some incentives—something Lee has discussed in recent quarters.

In March, Olive Garden said it would shift from nine to six deals per year. It was also going to slice the Buy One, Take One promotion from its 2018 calendar. The deal offers guests a take-home entrée for free with the purchase of another. One of the reasons for the scale back was to avoid yearly attrition with consumers. Lee said the strategy hit home.

“I think the big thing is that there may have been some pent-up demand because we didn't run it in the fourth quarter last year. So we had one extra week in the quarter for Buy One, Take One,” he said.

Lee added that, while clearly effective, he advises against pigeonholing the promotion as the reason Olive Garden surged sales. “I would caution anybody to point to one thing that drove the overall Olive Garden acceleration in comps and improved gap. I want to keep coming back to this is a confluence of a lot of hard work, a little bit of an extra increase in mix from strong promotions with good add-ons, but overall, I wouldn't want to point to just a promotional impact,” he said.

Staying true to the core customer

Part of the push four years ago, in addition to simplifying operations and improving execution, was to put value back into the menu. Lee said he’s most excited about Olive Garden’s continued ability “to find new ways to improve the value proposition for the Olive Garden consumer and do it in a way that is engaging and relevant.”

He said the social nature of Olive Garden has given it appeal across generations, especially with millennials—historically a challenging segment for casual-dining. “I think staying true to who we are is probably the most important thing that we're doing,” Lee said.

Where the other brands stand

Darden reported revenue of $2.06 billion in the first quarter, up from the year-ago mark of $1.94 billion. This beat Wall Street’s expectation of $2.03 billion. Darden achieved net income of $189.1 million and earnings per share of $1.34, an increase over last year’s 99 cents. This also beat analysts’ calls of $1.24. Darden’s blended same-store sales lifted 3.3 percent.

Broken down:

Olive Garden: 5.3 percent

LongHorn Steakhouse: 3.1 percent

The Capital Grill: 3.9 percent

Eddie V’s: 3 percent

Yard House: 0.6 percent

Bahama Breeze: 1.1 percent

Seasons 52: –1.9 percent

Cheddar’s Scratch Kitchen: –4 percent

Darden also raised its guidance on same-store sales grown from 1–2 percent to 2–2.5 percent, and lifted total sales from 4–5 percent to 5–5.5 percent.